Inflation

Inflation (pronounced in-fley-shuhn)

(1) In economics, a persistent, substantial rise in the general level of prices, often related to an increase in the money supply, resulting in the loss of value of currency.

(2) Of or pertaining to the act of inflating or the state of being inflated.

(3) In clinical medicine, the act of distending an organ or body part with a fluid or gas.

(4) In the study of the metrics of educational standards, an undue improvement in academic grades, unjustified by or unrelated to merit.

(5) In theoretical cosmology, an extremely rapid expansion in the size of the universe, said to have happened almost immediately after the big bang.

1300-1350: From the Middle English inflacioun & inflacion, from the Old French inflation (swelling), from the Latin inflationem (nominative īnflātiō) (expansion; a puffing up, a blowing into; flatulence), noun of action from the past participle stem of inflare (blow into, puff up) and thus related to from īnflātus, the perfect passive participle of īnflō (blow into, expand).  The construct of the figurative sense (inspire, encourage) was in- (into) (from the primitive Indo-European root en (in)) + flare (to blow) (from the primitive Indo-European root bhle- (to blow)).  The meaning "action of inflating with air or gas" dates from circa 1600 while the monetary sense of "a sustained increase in prices" replaced the original meaning (an increase in the amount of money in circulation), first recorded in US use in 1838,  The derived noun hyperinflation dates from 1925 when it was first used to describe the period of high inflation in Weimar Germany; earlier, surgeons had used the word when describing certain aspects of lung diseases.  The adjective inflationary was first used in 1916 as a historic reference to the factors which caused a rapid or sustained increase in prices.

The early meaning related to flatulence, the sense of a “swelling caused by gathering of "wind" in the body” before being adopted as a technical term by clinicians treating lung conditions.  The figurative use as in "outbursts of pride" was drawn directly from the Latin inflationem, nominative inflatio, as a noun of action from past participle stem of inflare (blow into; puff up).  The now most common use beyond the tyre business, that of economists to describe statistically significant movement in prices is derived from an earlier adoption by state treasuries to measure volume of money in circulation, first recorded in 1838 in the US; the money supply is now counted with a number of definitions (M1, M3 etc).  The first papers in cosmological inflation theory were published in 1979 by Cornell theoretical physicist Alan Guth (b 1947).

Cosmic Inflation

Cosmic inflation is a theory of exponential expansion of space in the early universe.  This inflationary period is speculated to have begun an indescribably short time after the start of the big bang and to have been about as brief.  Even now, space continues to expand, but at less rapid rates so the big bang is not just a past event but, after fourteen billion-odd years, still happening.

Definitely not to scale.

One implication of the scale of the expansion of space is the speculation that things, some of which may have been matter, may have travelled faster than the speed of light, suggesting the speed of light came into existence neither prior to or at the start of the big bang but after, possibly within a fraction of a second although, within the discipline, other models have been built.  The breaking of the Einsteinian speed limit may suggest conditions in that first fraction of a second of existence were so extreme the laws of physics may not merely have been different but may not have existed or have been even possible.  If that's true, it may be nonsensical to describe them as laws.  Matter, energy and time also may have come into existence later than the start of the big bang.

The theory has produced derivatives.  One notion is, even though it’s possible always to imagine an equation which can express any duration, time may not be divisible beyond a certain point; another that there can never exist a present, only a past or a future.  Perhaps most weird is the idea the (often labeled chaotic but actually unknown) conditions of the very early big bang could have progressed instead to expanding space but without matter, energy or time.  Among nihilists, there’s discussion about whether such a universe could be said to contain nothing, although an even more interesting question is whether a genuine state (non-state?) of nothing is possible even in theory.

Price Inflation

In economics, inflation is in the West is suddenly of interest because the rate has spiked.  The memories are bad because the inflation associated with the 1970s & 1980s was finally suppressed by central banks and some political realists good at managing expectations combining to engineer recessions and the consequent unemployment.  After that, in advanced economies, as inflation faded from memory to history, there tended to be more academic interest in the possibility deflation might emerge as a problem.  As the Bank of Japan discovered, high inflation was a nasty thing but experience and the textbooks at least provided case-studies of how it could be tamed whereas deflation, one established and remaining subject to the conditions which led to its existence, could verge on the insoluble.

In most of the West however, deflationary pressures tended to be sectoral components of the whole, the re-invented means of production and distribution in the Far East exporting unprecedented efficiencies to the West, the falling prices serving only to stimulate demand because they happened in isolation of other forces.  However, the neo-liberal model which began to prevail after the political and economic construct of the post-World War II settlement began to unravel was based on a contradictory implementation of supply-side economics: Restricting the money supply while simultaneously driving up asset prices.  That was always going to have consequences (and there were a few), one of which was the GFC (global financial crisis (2008-circa 2011)) which happened essentially because the rich had run out of customers with the capacity to service loans and had begun lending money to those who were never going to be able to pay it back.  Such lending has always happened but at scale, it can threaten entire financial infrastructures.  Whether that was actually the case in 2008 remains a thing of debate but such was the uncertainty at the time (much based on a widespread unwillingness of many to reveal their true positions) that everyone’s worst-case scenarios became their default assumption and the dynamics which have always driven markets in crisis (fear and stampede) spread.

What was clear in the wake of the failure of Lehman Brothers (1847-2008) was that much money had simply ceased to exist, a phenomenon discussed by a most interested Karl Marx (1818-1883) in Das Kapital (1867–1883) and while losses were widespread, of particular significance were those suffered by the rich because it was these which were restored (and more) by what came to be called quantitative easing (QE), actually a number of mechanisms but essentially increasing the money supply.  The text books had always mentioned the inflationary consequences of this but that had been based on the assumption that the supply would spread wide.  The reason the central bankers had little fear of inducing inflation (as measured by the equations which have been honed carefully since the 1970s so as not to frighten the horses) was that the money created was given almost exclusively to the rich, a device under which not only were the GFC losses made good but the QE system (by popular demand) was maintained, the wealth of rich increasing extraordinarily.  It proved trickle-down economics did work (at least as intended, a trickle being a measure of a very small flow), the inequalities of wealth in society now existing to an extent not seen in more than a century.

Salvator Mundi (circa 1500) by Leonardo da Vinci.  Claimed to be the artist's last known painting, in 2017 it sold at auction in 2017 for US$450.3 million, still a record and more than double that achieved by the next most expensive, Picasso’s Les femmes d’Alger (Version ‘O’), which made US$179.4 million in 2015.

Post GFC inflation did happen but it was sectorally specific, mansions and vintage Ferraris which once changed hands for a few million suddenly selling for tens of millions and a Leonardo of not entirely certain provenance managed not far from half a billion.  The generalized inflationary effect in the broad economy was subdued because (1) the share of the money supply held by the non-rich had been subject only to modest increases and (2) the pre-existing deflationary pressures which had for so long been helpful continued to operate.  By contrast, what governments were compelled (for their own survival) to do as the measures taken during the COVID-19 pandemic so affected economic activity, had the effect of increasing the money supply in the hands of those not rich and combined with (1) low interest rates which set the cost of money at close to zero, (2) pandemic-induced stresses in labour markets and supply and distribution chains and (3) the effects of Russia’s invasion of Ukraine created what is now called a “perfect storm”.  The inflation rate was already trending up even before the invasion but it has proved an accelerant.  In these circumstances, all that can be predicted is that the text-book reaction of central banks (raising interest rates) will be (1) a probably unavoidable over-reaction to deal with those factors which can be influenced by monetary policy and (2) will not affect the geopolitical factors which are vectors through which inflation is being exported to the West.  Central banks really have no choice other than to use the tools at their disposal and see what happens but the problem remains that while those tools are effective (if brutish) devices for dealing with demand-inflation, their utility in handling supply-inflation is limited. 

First world problem: It’s now hard to find a Ferrari 250 GTO for less than US$70 million.